A Guide to Terminating Employment in India

Labor law is a concurrent subject in the Indian Constitution, which implies that labor and employment regulations in the country are governed at both the federal and state levels. The main federal statutes that regulate the termination of employment include:

Contributing Advisor

Neeraj Khatri

Manager, Business Advisory Services

• The Industrial Employment (Standing Orders) Act (IESA), 1946 and
• The Industrial Disputes Act (IDA), 1947, as amended.

In addition, the Indian labor is regulated by the Shops and Establishments Act, which is enacted in most states with minor differences in rules of implementation. The Shops and Establishments Act regulates labor and employment in all premises where a trade, business, or profession is carried out. The implementation of respective state laws differs according to the area of operations of the employer—these are outlined in the laws and their supporting rules.

Absence of a standard termination process

There is no standard process to terminate an employee in India:

• An employee may be terminated according to terms laid out in the individual labor contract signed between the employee and the employer;
• Equally, the terms may be subject to the country’s labor laws. Here, employers should note that India’s labor laws supersede the provisions of labor contracts—any termination policy or clause outlined within a contract should be checked against the law by a professional; and
• In cases where there is no labor contract, or the labor contract does not define a method of termination, the matter comes under the jurisdiction of the specific state’s labor legislation. This is because Indian federal law does not explicitly require that employment contracts be in written form.

Indian law mainly recognizes two types of employers and two types of employees.

The types of employers include:

• Establishments – this term takes all kinds of employers under its umbrella.
• Factories – this term specifically refers to employers in the manufacturing sector.

Types of employees include:

• Employees – a term which refers to all employees in any kind of job position.
• Workmen – employees who are not employed in administrative, supervisory, or managerial roles are termed as workmen.

Types of termination of employment

Voluntary termination

Voluntary termination means that an employee voluntarily terminates their employment with a company. This might involve personal reasons on behalf of an employee, such as getting a new and better job, resigning from a field, or starting up their own venture.

Voluntary termination requires an employee to hand in a formal letter of resignation to the employer. The standard notice period is 30 to 60 days. But this term may be shorter or longer depending upon the organization.

Forced discharge of employees from an organization also falls under construction dismissal. An employee facing a forced discharge may be eligible for some form of unemployment benefits.

Involuntary termination

Involuntary termination is when an employee is made to leave an organization against their own free will. A company may opt for involuntary termination during layoffs, firing employees, downsizing, etc.

Layoffs and downsizing

Layoffs and Downsizing refer to a company reducing its workforce. Employees who are downsized are usually let go without their own fault. Companies downsize to save costs and restructure their workforce. Downsizing is common when a company is bankrupt or goes for a merger. Layoffs may also happen because an employee’s skill set is no longer useful for a company in the present day.

Getting fired

Employees may be fired from their jobs due to unsatisfactory work performance, or because their behaviors and attitudes cause trouble at the workplace. In many countries, including India, an employee who is fired for misconduct need not be given a notice. Employees that are fired for violating company policies must be given a chance to explain themselves before they are fired.

Illegal dismissals

Sufficient cause or reasons must be shown when employer dismisses an employee. Terminating an employee based on caste, race, color, gender, etc. are illegal causes of termination in many countries. An employee who has taken maternity leave or a leave of absence or has reported wrongdoings in an organization cannot be fired on these grounds.

If a company is found guilty of wrongfully terminating employees, they would be liable for compensation and to restore job positions or offer similar roles. Companies might also be penalized if found guilty of wrongful termination.

Termination under contract

Termination under contract occurs on specific, predetermined terms that are set at the time when an employee is offered the contract. For instance, advisors for private firms and internships are often offered for a specific time frame. At the end of this time frame, the employee is considered to be terminated, unless they are offered another contract, or the existing contract has been renewed.

Termination rules for employees

Whatever the cause of dismissing the employees, certain federal and central rules must be followed by every organization. Here are the six important rules that one must abide by before terminating one’s employees.

• A 30-to-90-day notice period is standard for terminating the workforce in any organization. In a manufacturing plant, mine or plantation unit with 100 or more workers, termination for convenience requires government approval . Terminating employees in other sectors requires only a government notification;
• Under Indian labor laws, an employee can be lawfully terminated from an organization for one of the following reasons:
  • Disobedience or will full insubordination;
  • Fraud, dishonesty, or theft;
  • Loss or Damage to the employer’s goods willfully;
  • Taking bribes or illegal gratifications;
  • Absence without applying for leave for more than 10 days;
  • Late attendance;
  • Disorderly behavior during work; or
  • Negligence of work.
• When organizations terminate their workforce for convenience, the policy regulates that the last person to join the organization must be the first one to leave. Also, when the organization rehires for the same or similar job roles, the terminated workforce should be prioritized;
• When an organization fires an employee for convenience who is pregnant or seeking maternity leave, they run the risk of non-compliance with the Maternity Benefit Act of 2017 in the Indian constitution;
• Non-solicitation clauses can be used in a limited fashion, whereas non-compete agreements cannot be enforced according to Indian law; and
• Most states in India have laws that allow for up to 10-15 days of paid leave in a year. Employees can get up to 10-15 days of sick or casual leave. Employees seeking leave under these criteria cannot be considered terminated.

Severance Payment

Severance pay is offered to employees who retire, are laid off, or reach the end of the contractual agreements. Employers are advised to consult relevant legal provisions applicable to their industry, location, and type of establishment.

The Payment of Gratuity Act, 1972 entitles employees to gratuity payment after five years of continuous service.

Employee termination checklist

Here’s a quick checklist that outlines some of the procedures that one must follow when terminating employees.

1. Consult the company’s HR policies

Before serving a notice of termination to any employee, one must examine the company’s HR rules and policies. Every company has a specific set of procedures for dealing with different scenarios.

2. Refer to the employee agreement

The employee agreement will contain provisions relating to the notice period, severance pay, compensation and so on that must be offered to the employee upon termination. This agreement is often signed at the beginning, and it serves as an important reference that holds up in a court of law.

3. Serve a notice

Serving a notice is a crucial part of employee termination. The severance notice must be given 30 to 90 days before termination. This notice must be given in writing, stating a clear reason as to why the employee is being terminated.

4. Settle the severance pay

Severance pay is offered to employees who retire, are laid off, or reach the end of the contractual agreements.

• One month’s salary must be paid to employees who have worked for a year or more.
• For mass termination in protected sectors, three months of wages must be offered to employees.
• The Payment of Gratuity Act entitles employees to gratuity payment after five years of continuous service.
• The Industrial Disputes Act of 1972, also states that retrenched (involuntarily dismissed) workmen must be given 15 days of severance pay for each year of service that they have completed.

5. Conduct an exit interview

Exit interviews help an organization to gain feedback and evaluate their work culture, environment, ethics etc. It also helps organizations to narrow down their areas of improvement when it comes to enhancing employee experience in the office.

Employee protection and court jurisdiction in case of disputes

An employee who has been dismissed has a legal right to appeal to their jurisdictional authority. The employee could appeal to a court for one of the following reasons:

• The employer has terminated an employee without stating a specific reason;
• The employee has not been proven to be guilty of misconduct and pleads innocence; or
• The employee feels that their dismissal was based on unfair grounds.

When an employee seeks redressal of any of the following grievances, they must first establish a case and seek the approval of their local labor authorities. Once the approval is granted, the case may be overseen by jurisdictional conciliation officers, industrial tribunals, or labor courts.

Most workforce disputes in India take anywhere between six months to two years to get resolved.